Market-Rate Housing Has a Phase-In

Over the last summer, St. Paul residents and councilmembers tangled over plans to rezone the former Dixie’s retail space on Grand Avenue. The proposal would change the plot, which has a parking lot and a one-story building with three restaurants, from B2 to T3 zoning. The maximum floor-area ratio would go from 2 to 3, and the maximum height would go from 30 to 55 feet, clearing the path for 81 new apartments on top of first-floor retail space. On June 17, the Summit Hill Association voted to recommend approval for the rezoning.

A rendering of the proposed redevelopment on Grand Avenue (courtesy Star Tribune)

The City Council approved the measure, however, by only a 4-3 vote. Over two meetings in the middle of August, the three “no” votes voiced their reasons for opposition to the rezoning.

Councilmembers Rebecca Noecker and Jane Prince voted “no” for reasons that housing advocates might find unconvincing. Noecker found it out of character for the neighborhood, noting that there was “no other T3 zoning on East Grand, and very few buildings that come close to its height and massing limits.” Prince agreed, also pointing to the area’s status as a historic district. Each thought a smaller-scale rezoning was more appropriate.

Councilmember Nelsie Yang voted no because of concerns about affordability. Yang argued that the development, which was all market-rate units, “would continue to perpetuate certain neighborhoods that only folks with certain incomes can move into.” 

I don’t think Yang was quite right that adding apartments to Grand would serve to keep the neighborhood exclusive. I agree more with Councilmember Mitra Jalali, who commented that building market-rate housing in affluent neighborhoods “actually helps absorb both income diversity in that part of town [and] also allows for more range of housing throughout the community.”

But Yang was probably right that market-rate development wasn’t going to make much of a difference for some of the poorest residents in St. Paul. This is because market-rate housing has a phase-in.

What’s in a Phase-in?

From the Tax Policy Center: The Earned Income Tax Credit has a phase-in.

Most welfare programs have benefits that get lower as income increases. For a means-tested program, this makes sense; the lowest-income people have more need for subsidy, cash assistance or service provision. It’s not counterintuitive that the Supplemental Nutrition Assistance Program (SNAP, also known as food stamps) is targeted to poorer people.

But some American welfare policy has a phase-in, meaning that the benefits initially increase as income increases. People who are unemployed receive nothing from such programs. The Earned Income Tax Credit (EITC), depicted above, is one such program: Note the upward slope in benefits for lower incomes. 

Market-rate housing has its own phase-in. The lower one’s income, the less they will feel the benefits of a given market-rate development.

Rapidly growing housing costs hurt everybody, of course. And when underbuilt neighborhoods like Mac-Groveland become prohibitively expensive, people have no choice but to move to more racially diverse, low-income neighborhoods like Frogtown, where property values and rents have spiked. Mayor Melvin Carter calls this a “push-down effect.” 

Because a housing shortage pushes up rents everywhere, expanding the housing supply benefits renters across the city. We certainly should build tall apartment buildings on Grand Avenue, because it’s good to build more places for people to live in expensive neighborhoods.

However, it’s also true that the marginal benefit of this Grand Avenue development will be unevenly distributed, with less benefit for poorer St. Paulites. 

A Brief Theoretical and Empirical Foundation

In a market where all the sellers’ products are pretty much interchangeable, supply and demand tend to work predictably. If some sellers doubled the amount of eggs they were producing, supply would increase and the price of eggs would uniformly fall.

But housing markets complicate the situation: Housing operates in differentiated submarkets. Housing is not interchangeable for consumers. A family looking for a duplex with a backyard will place a different value on a mid-rise apartment on a retail corridor. A low-income renter in a studio apartment will, definitionally, not be in the market to rent an expensive single-family house. Therefore, if some sellers doubled the amount of houses on the market, we’d expect the prices of housing to fall unevenly across different submarkets.

New market-rate development, which often has more amenities, tends to be expensive. Therefore, the theory of submarkets suggests that the upwards supply shift from market-rate development would cause other expensive units especially to become cheaper, while having a more muted effect on cheaper units — the basis for our phase-in.

One way to test this theory is to examine how supply increases affect different price levels of the market. 

In 2020, Anthony Damiano and Christopher Frenier from the University of Minnesota’s Center for Urban & Regional Affairs (CURA) put out a working paper examining the effect that market-rate development in Minneapolis had on nearby rents. They compared the changes in rents between houses that were next to new market-rate development (within 300 meters or less) and houses that were slightly farther away (300 to 800 meters away) — but they disaggregate the data by submarket.

Damiano and Frenier found that, relative to the control area, market-rate development actually raised prices for the cheapest units, while lowering prices for the most expensive units. For units near the new construction in the bottom quartile of the market, rents increased by 6.6 percent, while the middle half of the market saw no significant change, and the upper quartile saw a 3.1 percent decrease. Or, a phase-in: Low-income renters benefit less — or are actually harmed — compared with wealthier renters.

Evan Mast at the Upjohn Institute has a 2019 paper that works with submarkets and also finds a phase-in. Using both empirical data and a simulated model, Mast looked at vacancy chains across entire metro areas: When new apartments are built, some people move into them and leave behind vacancies in cheaper apartments, then other people move into those secondary vacancies and leave behind spots, and so forth. Empirically, Mast followed these chains through six transfers. He found that new units in the highest quintile of the market create vacancies all the way down to the lowest quintile within five years.

In his simulated model, Mast estimated the amount of equivalent units that might be “created,” or made vacant, in cheaper submarkets. He estimated that a new market-rate unit will open about 0.7 units in census tracts with below-median income, and about 0.2 units in census tracts with income below the 20th percentile. Mast’s research again showed that submarkets exist — although they can be permeable, he found. 

Damiano and Frenier look at neighborhood effects on prices, and Mast looks at regional effects on vacancies. But both studies display the operation of housing submarkets, thereby helping us see the market-rate development’s phase-in. The level of benefit is increasingly less for those in cheaper submarkets (i.e., low-income renters).

We should also expect the benefits of market-rate housing to eventually fall to zero for the very poorest. Housing has a cost, and landlords can’t operate in the red. Indeed, market-rate construction is unlikely ever to be sufficient because not all housing problems are specifically about housing affordability — sometimes we have a more general problem of poverty. If housing prices are close to the underlying costs of production and maintenance, we know that more construction won’t further lower prices. Some people might just always be too poor to afford market-rate housing (this distinction was introduced to me in a paper by housing economists Edward Glaeser and Joseph Gyourko).

For example, HousingLink reports that over the past year, St. Paul has not had a single rental unit available for someone making less than 30 percent of the Area Median Income (AMI), which is circa $30,000 annually. New apartments on Grand Avenue will do nothing about that. 

This comes up in Mast’s paper, where he acknowledges that at some point, more vacancies won’t reduce rents in the lowest submarket, because prices have bottomed out — “market mechanisms cannot induce for-profit landlords to lower prices below marginal cost.” So expensive new housing has smaller effects for lower-income than higher-income renters, and the very poorest might never stand to benefit from market-rate housing construction.

The Political Economy of a Phase-In

If market-rate housing has a phase-in, then we’re left with three implications. 

First, it reminds us that market-rate housing alone is inadequate. Welfare phase-ins are bad. The Child Tax Credit (CTC) had a phase-in for 24 years, until the Biden administration temporarily broadened it. The phase-in kept the children with the most material need in poverty.

Second, market-rate housing remains beneficial. While the EITC and CTC are flawed for their phase-ins, we shouldn’t eliminate them — they have been meaningful anti-poverty programs. We should just expand them so that the poorest can benefit too

Likewise, we shouldn’t stop building market-rate housing. Relieving the pressure of the housing shortage is important. Moves to block market-rate housing in our most expensive and exclusive neighborhoods just end up hurting everybody. 

Third, these first two facts of market-rate development make the political economy of housing construction difficult. It’s clearly important to build new housing in our growing city, as is true for growing cities everywhere. At the same time, people with the lowest incomes, and thereby facing the most risk of displacement and financial pain from rents, don’t see the benefit of market-rate housing — especially not on the margin. Even though Councilmember Yang’s vote against the Grand Avenue redevelopment was counterproductive to greater goals of affordability, she was right that it wouldn’t do much for the poorest St. Paulites.

What to Do, What to Do

If the uneven distribution of market-rate housing’s benefits creates both an economic and political problem, then we need policy changes that will address the problem. We shouldn’t block market-rate housing; we should eliminate the “phase-in” by concentrating additional benefits toward those most in need.

This means finding ways to increase housing supply while also specifically protecting and assisting low-income renters. We’ve got a few familiar options. 

On the demand side, Section 8 is an effective program to target renters in need. The program either subsidizes landlords or provides renters with vouchers in order to house low-income people, which nicely complements expansions in housing supply. However, 75 percent of renters eligible for rental assistance don’t receive the benefits because the program is underfunded. That’s a policy disaster.

Even better than Section 8 would be programs that give money to low-income people with no strings attached. Sometimes, the root cause of housing insecurity is poverty itself, and attacking poverty will help. Demand-side assistance can put a wider range of housing within reach for poorer renters, helping more people access the benefits of new housing development.

We need supply-side policy too. If we want to help more people afford housing, housing supply — especially housing supply in the lowest market segment — needs to expand accordingly.

Zoning reform and other regulatory changes, such as removing parking minimums, are important but insufficient. They will help markets work better but won’t address the differential benefits of market-rate housing.

The government can help soften the phase-in by spending money on supply-side policies that benefit the poor. Housing researcher Paul E. Williams has some great work on supply-side policies: We have the Low-Income Housing Tax Credit, which encourages the construction and rehabilitation of housing for low-income renters. It’s not perfect, but increasing funding for the program is worthwhile. We should also direct more money toward public housing and community land trusts, which can ensure that all are housed. 

Last December, St. Paul and Ramsey County took an encouraging step here. Wielding the fiscal firepower of the federal government, they committed $74 million in American Rescue Plan funding toward building housing specifically at the 30 percent AMI level. Urban geographer (and contributor) Bill Lindeke reports that this will help build at least 1,000 homes at 30 percent AMI over a few years. This is a step in the right direction that should be expanded and instituted, not just a one-time influx of money; currently, 15,000 families are in need of this type of housing in Ramsey County.

Implementing these changes is more a matter of political will than generating new and clever ideas — although that doesn’t make these changes any easier to accomplish.

Market-rate housing is beneficial but flawed. Putting these policies into place will help insulate us from market-rate housing’s phase-in, ensuring that low-income renters are stable and protected. If low-income renters don’t have to fear for their own housing security and mobility, market-rate development can stop being a cause for concern.

In discussion of housing politics, this article has entirely set aside perspectives such as Noecker’s and Prince’s, which are concerned about neighborhood character or historical preservation. Smoothing the phase-in doesn’t eliminate that basis for opposition — but it can help strengthen a coalition that will favor new housing development, bringing us toward a better housing paradigm.

The Spruce Tree Centre is admired by policymakers for never “phasing in” — it has a downward slope only (Google Maps).

About Zak Yudhishthu

Pronouns: He/him

Zak is a student at Macalester College studying economics and music. He's interested in all kinds of urban politics and policy, and is the student representative for the Macalester-Groveland Neighborhood Council. Tweet him @zyudhishthu or email him at zyudhishthu@yahoo[dot]com.